Featured on McKinsey's Talking Banking Matters podcast
Alviere CEO and co-founder, Pedro Silva, joins McKinsey's payments sector leader, Roshan Varadarajan, to discuss how the embedded finance landscape is evolving and what it means for every business.
The full transcript and recording is available on the McKinsey website, you can also listen on Apple podcasts or Spotify.
Here's an excerpt of the discussion:
Why embedded finance for large enterprises?
Roshan Varadarajan: So now you’ve taken the decision to focus Alviere on relatively large enterprises, meaning that you’re helping established brands extend themselves to offer financial services. What is the vision behind the platform as it exists today and how it creates value for different customer types?
Pedro Silva: We aim to be a one-stop shop for large enterprises to provide financial services to their clients. We focus on nonfinancial institutions. They don’t want to hire new compliance teams and develop new competencies inside their companies. They will only do that if it makes sense for the core business. The Starbucks app is a great example. They didn’t start by wanting to provide a financial product. They wanted to guarantee future sales, and they saw that there was a financial product that could help them with that.
Thinking about these large enterprises shapes your model. They want one single contract, and they expect you to do it all for them. We understood that we would have to help them out, and we had to make it easy. That’s how we chose the model. You need to guide them through the entire process. It’s not about “Here’s an API key. We’ve got our tech team over there. Go ahead and integrate with it.” No, you need to actually have professional services and project managers that will manage that PMO [project management office] process, and solution architects and business analysts that will help them and guide them through that process.
"Once they understand the concept, then it’s about ‘OK, how easily can I do this? Is it going to take me three years, five years? What do I need to do?’ That’s where we come along and say, ‘You will have to do something to integrate it into your platform, but we will provide the entire service for you.’"
Where is the demand for embedded finance?
Roshan Varadarajan: The term “embedded finance” has taken on a range of meanings that can include card platforms, deposits, and lending. Where do you see the most opportunity from the perspective of customer demand and the economics of it for Alviere? And how does that inform the products within embedded finance that you focus on?
Pedro Silva: We see different demand in different markets, different verticals, and even different company types. If it’s a company in the consumer market, for example, and in retail, and they are interested in increasing foot traffic, you see a lot of demand for products like remittances and—one of the products we launched—a digital wallet you can load with funds for future purchases. Now you have a balance, and when you get to the counter, you can pay with a QR code. For the merchant, the payment was free, you already paid for it in advance, but you guaranteed future sales and, of course, extra benefits such as earning a yield on those balances.
We believe there’s an emerging model that adds to that. If you find an efficient way of loading funds into that wallet, then you eliminate network fees, so wallets are fully featured with a unique routing number and account number. That means you can wire funds in, for example, and that costs nothing to the merchant. And there are obviously ways to incentivize that behavior.
In airlines, for example, it’s a lot more about cards. There’s a big movement in airlines and hotels right now. They all have cobranded credit cards. The problem is, the rejection rates, depending on the brand and the audience, are pretty high. And there’s a large portion of businesses that are missing out on loyalty. The solution now trending is there could be a cobranded debit card, which works in a different way, of course, but where you can still earn points and other types of benefits by spending money. Obviously, the business model is very different. Interchange on credit cards is different, and there is the whole credit and APR [annual percentage rate] monetization on those other products on the credit side. But it’s still a product that makes a ton of sense.
On the B2B side, we see a lot of payment optimization, which has to do with optimization of banking services wallets. For example, if you were a marketplace, as opposed to doing all those transactions and then passing it on to your sellers, you could provide them a balance within your app. And now you can start monetizing. First, that payment didn’t cost you anything to load to that wallet, and second, now you can put a debit card on top of that and start earning on interchange. Or you can charge for an international transaction.
Different industries are looking for different products, and that’s why we think we’re in a great position. We have a very diversified portfolio of products. We don’t sell the same things to different clients. We focus on solutions rather than the platform.
What are the key buying criteria for embedded finance?
Roshan Varadarajan: The buying factors for an embedded-finance offering can be somewhat opaque. On the one hand, there’s the technology, the ease of integration, and the actual user experience. But depending on the product, there can be risk engines involved. There’s the whole compliance and regulatory side of it. As more and more of these offerings crop up, how does Alviere differentiate itself?
Pedro Silva: On the buying factor side, large enterprises will buy if it feeds their core business. This means they have their own core business, and adding a financial product is going to generate more revenue, reduce costs, create more loyalty, or help with acquiring and retaining customers. In these large, established enterprises, the services need to enhance the core business.
The second decision factor is that there can’t be any regulatory liability. With these large brands, there’s obviously a reputational risk involved in selecting these services. They need to be absolutely sure that what they’re doing is not going to put their brand at risk.
The third factor is the technology needs to be modern, easy to integrate, with a low lift, and fully featured with a road map that will support the enterprise in the future on growth, with the ability to scale to millions of transactions.
The fourth one is they want it easy. Clients would like to see one contract with one company: “I sign the contract. You guys take care of everything.” That means, if there’s any compliance-related matter, an AML [anti-money-laundering] alert, Consumer Finance Protection Bureau complaint, whatever it is, they don’t want to deal with it.
The licensing piece is essential, of course. We believe that each player in the value chain needs to be accountable for, ultimately, consumer businesses’ funds. That is where Alviere is very different. We are not compliant because a bank asks us to be, we are compliant because we’re licensed. We’re constantly examined and audited.
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